The Swiss National Bank’s January 2015 decision to abandon the Swiss franc’s peg to the euro led to short-term chaos in exchange markets and had a dampening effect on the Swiss economy. Some economists suggested Switzerland was poised to enter a sustained period of stagnation à la Japan. The decision also reignited policy debate on the benefits and drawbacks to central bank intervention in currency markets. While such intervention can be justified in certain situations, such as if the market is producing the “wrong rate”, it can also impose significant economic costs. The ECB’s recently implemented quantitative easing programme has been regarded by many as a thinly disguised attempt to weaken the euro in order to improve the eurozone’s competitiveness. However, the euro’s recent weakening began well before the ECB announced its programme; moreover, previous rounds of quantitative easing by other central banks have had minimal impact on exchange rates.

Although growth has returned to the periphery of Europe, with Spain, Ireland, Portugal and even Greece posting positive numbers, the rate of growth in their debts still outpaces their rate of GDP growth. That means, for example, that Portugal would have to run a current account surplus at Chinese levels for over a decade to get unemployment down to single figures, and that is simply not going to happen. Indeed, the most recent ECB unemployment projections predict double-digit unemployment out to 2017, regardless of the incipient recovery. Standard macro theory imagines that fiscal contractions are recessionary in the short run, but in the long run the supply side determines the trend rate of growth. What the eurozone has recently shown us is that you can contract so severely on the demand side that the supply side of the economy can be permanently damaged, which may have lowered inflationary expectations to a deflationary equilibrium point. This is extremely dangerous – more so for political than economic reasons.